Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.</li>
<li>In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. </li>
<li>In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.</li>
</ul>


The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.
In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. 
In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.


South African Rand – Watch for Headwinds in 2022

<ul>
<li>With rates in India vulnerable to a further correction in the US, I recommend paying India 5y vs receiving Mexico 5y rate in a beta-neutral ratio.</li>
<li>Real rates in India are the lowest among major emerging countries, which along with rising inflation expectations and strong growth should pressure the RBI to raise rates soon.</li>
<li>Mexico is appealing as a receiver against paying in India because the central bank is further along in its monetary tightening cycle as is evident from the high real rates.</li>
</ul>


With rates in India vulnerable to a further correction in the US, I recommend paying India 5y vs receiving Mexico 5y rate in a beta-neutral ratio.
Real rates in India are the lowest among major emerging countries, which along with rising inflation expectations and strong growth should pressure the RBI to raise rates soon.
Mexico is appealing as a receiver against paying in India because the central bank is further along in its monetary tightening cycle as is evident from the high real rates.


Alpha Bites: Pay India 5y Vs Receive Mexico 5y Local Rate

<ul>
<li>I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which currencies may offer opportunities this year.</li>
<li>The currencies to track this year for opportunities to buy are Chilean peso and Peruvian sol, and to sell are Colombian peso and South African rand. </li>
<li>Among currencies that already look appealing to buy are the Indian rupee and the Thai baht, while the Chinese yuan and the Czech koruna appear expensive.</li>
</ul>


I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which currencies may offer opportunities this year.
The currencies to track this year for opportunities to buy are Chilean peso and Peruvian sol, and to sell are Colombian peso and South African rand. 
Among currencies that already look appealing to buy are the Indian rupee and the Thai baht, while the Chinese yuan and the Czech koruna appear expensive.


Not All Winners Are Equal: 2021 EM FX Outliers and Implications for 2022

<ul>
<li>The Indian rupee has underperformed because of growth fears from the Omicron variant, RBI staying on hold even as the Fed signaled rate hikes, and outflows from the equity markets.</li>
<li>The growth fears may be overdone and the pressure on the RBI to tighten monetary policy should increase on rising inflation expectations and with the Fed tightening.</li>
<li>Shorting Indonesian rupiah (IDR) against INR makes sense as Bank Indonesia should delay rate hikes due to the weak economic recovery and benign inflation, even if the Fed starts hiking.</li>
</ul>


The Indian rupee has underperformed because of growth fears from the Omicron variant, RBI staying on hold even as the Fed signaled rate hikes, and outflows from the equity markets.
The growth fears may be overdone and the pressure on the RBI to tighten monetary policy should increase on rising inflation expectations and with the Fed tightening.
Shorting Indonesian rupiah (IDR) against INR makes sense as Bank Indonesia should delay rate hikes due to the weak economic recovery and benign inflation, even if the Fed starts hiking.


Alpha Bites: Long Indian Rupee (INR) Vs Short Indonesian Rupiah (IDR)

<ul>
<li>I reiterate the risk that the dollar can strengthen in the near term by being on one of the two ends of the dollar smile, thus weighing on EM currencies.</li>
<li>On the positive side, the dollar strengthening should not last since the currency is already expensive in REER terms. Also, long speculative positions in the dollar are already quite heavy.</li>
<li>Since positions tend to follow dollar moves, whenever the dollar starts weakening, the unwinding of long positions can exacerbate the move, making it a supportive environment for EM currencies.</li>
</ul>


I reiterate the risk that the dollar can strengthen in the near term by being on one of the two ends of the dollar smile, thus weighing on EM currencies.
On the positive side, the dollar strengthening should not last since the currency is already expensive in REER terms. Also, long speculative positions in the dollar are already quite heavy.
Since positions tend to follow dollar moves, whenever the dollar starts weakening, the unwinding of long positions can exacerbate the move, making it a supportive environment for EM currencies.


Speculative Long Dollar Positions Highest Since 2019

India

The Indian rupee is the official currency of India. 

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South African Rand – Watch for Headwinds in 2022

In 2022, I expect the South African rand to underperform on the back of a weak economic outlook, low carry relative to its volatility, and the...

Gautam Jain, PhD, CFA

Alpha Bites: Pay India 5y Vs Receive Mexico 5y Local Rate

With rates in India one of the most vulnerable to a further correction in the US, I recommend paying the 5-year local rate in India vs receiving...

Gautam Jain, PhD, CFA

Not All Winners Are Equal: 2021 EM FX Outliers and Implications for 2022

I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which...

Gautam Jain, PhD, CFA

Alpha Bites: Long Indian Rupee (INR) Vs Short Indonesian Rupiah (IDR)

I recommend a Long Indian rupee/Short Indonesian rupiah trade as the monetary policies of the two countries are set to diverge with India raising...

Gautam Jain, PhD, CFA

Speculative Long Dollar Positions Highest Since 2019

Long speculative positions in the dollar are quite heavy implying that whenever the dollar starts weakening, the unwinding of long positions can...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)